As noted below, John Kerry is charging that the administration has a "January surprise" in store to privatize Social Security:
Kerry said Bush's plan would "blow a $2 trillion hole in Social Security" and, according to the bipartisan Congressional Budget Office, translate into a 25% to 45% cut in benefits. He released an ad Sunday making the same points, to run in states his aides declined to name.Bush outlined the gist of his plan in the pair's final debate last week and said it would be "a vital issue" in his second term. He said older beneficiaries would "continue to get their checks." He did not say whether they would be the same amount or what he would do to make up the shortfall as young workers took their money out of the pool for retirees.
Next line for Kerry: "Bill Clinton put an end to welfare as we know it. George W. Bush plans to end Social Security as we know it. Do you want that?"
Steve Schmidt, a spokesman for Bush, said Kerry lifted a "made-up" quote from a reporter hostile to Bush "to make a false, baseless attack."Schmidt said the president never used the word "privatized" because his plan would not privatize the system.
A Knight Ridder story about the admnistration's preparation for post war Iraq includes the following:
"We didn't go in with a plan. We went in with a theory," said a veteran State Department officer who was directly involved in Iraq policy.
Before Mr. Bush's inkling can be properly characterized as a "plan," a number of queston must be answered.
First, and foremost, Mr. Bush needs to answer how he is going to pay for private accounts. Social Security taxes on the current generation of workers are used to pay the benefits of the current generation of retirees. Diverting two percentage points of Social Security taxes to private accounts would open a gap in Social Security funding of at least one trillion dollars. That figure is from a CBO study conducted three years ago. The current cost is likely to be at least $1.5 trillion and perhaps as high as $2 trillion.
The gap can only be closed in two ways, higher taxes or lower benefits. If we choose to pay as we go, those burdens will be borne by current retirees (in the form of lower benefits) or current workers (in the form of higher taxes).
Alternatively, we could borrow the money to finance the gap in which case the costs, plus interest on the loan, will be borne by future workers (in the form of higher taxes) or future retirees (in the form of lower benefits).
There was a time, only four years ago, in which we had the money to finance such a transition to a system of private accounts. That opportunity evaporated as the current adminstration chose instead to increase spending and to cut taxes on the wealthiest Americans. If Mr. Bush believes that reforming Social Security to include private accounts is essential to the interests of the country, he should have proposed them in 2001 and agreed to forego his tax cut for the $300,000 a year crowd to pay for the transition. He did not do so. Now he has a much harder set of financing options. Until he chooses one of those options, he can not be said to have a plan.
Mr. Bush's notion of moving to an "ownership society" involves shifting risks to individuals. He can not be said to have a plan until he clearly states what happens when the risk comes crashing down fall on a specific person. If a person invests his or her private accounts in Enron stock, will society permit that person to simply starve to death in old age? If not, the fiscal argument for private accounts crumbles.
There are risks other than bad stock selection as well. The idea of private accounts is to permit investment in stocks instead of bonds in order to generate greater returns without the government selecting the stocks. Over the long haul, a highly diversified portfolio of stocks does have greater returns than a similar portfolio of government bonds.
The greater returns of stocks in comparison to bonds is generated by assuming greater risk. Stocks may provide greater returns in the long run but retirement is on a date certain. A person who unluckily retires during a bear market may find the greater returns of stocks to be an illusion. Are we going to let such unlucky persons simply starve?
Bonds are different. They are a loan to the government (or a corporation) with a date certain on which the principle will be paid back. If interest rates rise, causing the value of the bond to drop, the lender (the bond holder) can always opt to simply collect his or her interest payments, wait for the bond to mature, and reclaim the loan principle. As an aside, that is one reason not to invest in bond mutual funds. One part of the Tao of Deb is "bond funds are like men, they never mature."
Unless the private Social Security accounts are invested in stocks, there is no greater return than the current arrangement. Until Mr. Bush explains exactly what happens to those who suffer from taking on the greater risk of stocks, he has no plan.
Finally, one part of Social Security is not a retirement plan at all. Social Security provides benefits to widows, orphans, and the disabled. It is a form of social insurance. Until Mr. Bush explains what effect private accounts will have on the social insurance (as opposed to the retirement) aspect of Social Security, he has no plan.
There are other problems associated with private accounts. Those problems include lack of investment sophistication of many Americans, opportunity for fraud, administrative costs, and many, many others. Until those problems are addressed, Mr. Bush has a theory, not a plan. You can see how well his theories play out in practice by watching the news from Iraq.
John Kerry is right to attack Mr. Bush for his stance on Social Security. He is wrong to call it a plan.
Posted by Dwight Meredith at October 18, 2004 09:10 AM | TrackBack